From bulls to bears

In the last month or so, the world's stock markets have taken a huge tumble, down about 20% on average. Of course, prices of shares in most markets are still way above where they were five years ago and even still above levels of 18 months ago. After the excitement of the US stock market index, the Dow, going over 10,000, it seemed there was no stopping the boom. The Dow hit 11,500 and the NASDAQ index, which combines the prices of all the new high-technology and Internet company shares (like Yahoo, Cisco, Microsoft and Amazon), rose to an amazing 4,500 from just 1,000 only two years ago. There was even talk of the Dow going to 36,000 within a few years! But the trend now is clearly downwards. The Dow has fallen back to just above 10,000 as I write and the NASDAQ is back to 3,000. The casino capitalism of the stock market is in what they call a bear market."

In the last month or so, the world's stock markets have taken a
huge tumble, down about 20% on average. Of course, prices of shares
in most markets are still way above where they were five years ago
and even still above levels of 18 months ago. After the excitement of
the US stock market index, the Dow, going over 10,000, it seemed
there was no stopping the boom. The Dow hit 11,500 and the NASDAQ
index, which combines the prices of all the new high-technology and
Internet company shares (like Yahoo, Cisco, Microsoft and Amazon),
rose to an amazing 4,500 from just 1,000 only two years ago. There
was even talk of the Dow going to 36,000 within a few years!

But the trend now is clearly downwards. The Dow has fallen back to
just above 10,000 as I write and the NASDAQ is back to 3,000. The
casino capitalism of the stock market is in what they call a bear
market.

It's not too difficult to see why the previous super-optimism
about the prospects for capitalism has turned sour. In the last
month, the big US companies have been reporting their profits to
their shareholders. And all is not well. The growth in profits is
slowing in nearly all cases and is certainly less than the investors
in the stock market boom are hoping for. Profits are not actually
declining yet and the big companies are not suffering losses, but the
trend is downwards.

And much more to the point, the rate of profit is falling. By that
I mean, the return on each dollar of investment in new technology and
more labour is falling from say 12c to under 9c. That means the gains
from making such huge investments in the Internet and computers are
not producing the extra profit at the same rate.

Marx explained how this would happen under capitalism. Capitalism
is system of production that only produces more if the private owners
of the means of production (land, plant, equipment and employers of
labour) make more money than they invest. But each individual
capitalist is in competition with others to buy labour and equipment
at its cheapest and to gain the biggest share of the market for
products and services at the highest bearable price. Competition
tends to drive up the cost of inputs into production and drive down
the price of sale of what is produced. The way to maximise profits is
to invest in better technology that undercuts rivals.

Since 1995, US capitalists have been engaged in the most
competitive struggle to increase productivity through new technology
and the Internet economy. There has been a huge growth in investment
in new equipment at an unparalleled rate of 8% a year, not matched
since 1965. At the same time the growth in extra labour has been kept
to a minimum, just 1% a year. That has boosted output per worker
dramatically, from just 1.4% a year between 1973 and 1995 to 3% a
year now. No wonder profits have rocketed.

But as Marx explained, this cannot continue indefinitely under
competitive capitalism. More and more companies have been trying to
get into the new technology/Internet sector. Start-up firms, as they
are called, have been appearing by the day. Nearly all of capitalist
investment went into the new technology sector, with investment
rising at 25% a year, while investment in the old traditional
companies like chemicals, motor cars etc. rose at only 3% a year.

Now there is a great debate among the capitalist economists about
whether all this new technology investment is really raising the
productivity of capitalism across the board or not. Professor Robert
Gordon argues all the productivity gains are just in the computer
sector itself as the cost of computers falls. There has been no real
boost in productivity in the rest of industry. The Federal Reserve
Bank is America's most important financial institution. Its
economists have rejected Gordon's arguments, saying that new
technology has indeed boosted the rest of the economy. Other
economists say, even if it has, it's only because workers are slaves
to their computers. They put in more hours outside of normal time (at
home, at lunch time etc.) and in this way there is a boost to
productivity.

Whoever is right, what is clear is that huge amounts of money
capital were thrown at these new technology companies with the aim of
making huge profits quickly. These companies ate more and more
capital but most have not got huge sales or profits in return. The
money has started to run out, these firms are going bust and the
investors are losing their money. The mood of optimism is changing.

And it's not just the small companies that are proving bad
investments. The big new technology companies are now saying that the
prospects don't look so good. More interestingly, if you analyse the
profits results of these companies you can see the seeds of
disappointment ahead.

Cisco Systems is the world-wide leader in providing networks for
the Internet. This is a huge company that has appeared from nowhere
in the last five years. It is the epitome of the new economy. It
recently produced results that showed a jump in profits from just
under $1bn a quarter in 1999 to $1.5bn in the quarter ending July
2000. Pretty impressive, so all is well? No, because these figures
left out two important aspects. The first was the buying up of other
new technology companies. When the cost of that is included, the net
profits actually fell from $850m to $820m. In other words, Cisco had
to keep buying up competitors or companies with important
technologies to stay ahead. In doing so, its profits fell. Of course,
Cisco made profits from these acquisitions worth $344m. Adding that
in boosted profits. But increasingly, Cisco's profits are not coming
from its own businesses but from investment in the shares of others.
If the stock market goes down, so will the profits of Cisco. And if
the profits of Cisco go down, then investors in the stock market will
sell everything. That's started to happen.

There has been a stupendous investment in computer technology.
Production of semiconductors up 77% this year. This spells
overcapacity, especially as each extra bit of investment is producing
less of bit of profit - the rate of profit is falling. So far, that
means a slower growth in overall profit. Soon it will mean an actual
fall in profit. Then the crisis of over-investment will turn into a
crisis of overproduction.

The US economy is slowing. Instead of racing ahead at 5% a year,
it is slipping back to around a 3.55 rate. The big question is: will
it fall even harder towards zero and thus drag down the rest of the
capitalist world into recession or slump. There are several trends
that suggest it will. First, if investment slackens off because the
rate of profit is in decline, then the productivity growth in
industry will also fall back. Slower growth of productivity will mean
production costs will rise squeezing profits further.

Second, the shock of high oil prices is beginning to drive up
costs of production as well. And with petrol and heating costs
rising, workers in America and Europe are demanding either relief or
they will want higher wages. That will not mean higher prices so much
because of the intense competition among capitalists for market
share, particularly in the Internet sectors. The result will be
another squeeze on profits.

Third, the bear market in stocks and shares will hit the real
economy too. In 1998, shares were equivalent to over 20% of all the
savings of American households. Sucked in by the huge boom in share
prices since 1995, never have American middle class families' futures
depended so much on the Dow and the NASDAQ. If share prices keep
falling, households will feel poorer and stop spending. And
capitalist markets will die because of the lack of consumption. And a
falling stock market will also hit further investment by capitalists
as their income that companies like Cisco get from stock market
investments disappear.

This year the global capitalist economy will have grown by about
4% overall. That's the best result since before the Asian crisis. And
it's a big improvement over 1999's 2.8% growth, when there was talk
of a new recession. But without the US growing at a breakneck pace of
5%, world growth would have been a lot less. The US is not going to
repeat that next year. Indeed, it is more likely to head into less
than 2% growth. Europe's growth already seems to be peaking as a weak
Euro and rising oil prices bite into investor confidence. Japan
remains weak and Asian economies seem to be slipping back into a pool
of political strife (Indonesia), corruption (Philippines) and debt
(Korea and Thailand). Sub-2% growth is on the agenda next year and it
could be worse.

Oil prices rising, a Middle East crisis, a falling rate of profit
amid an apparent boom in the world economy - it all looks much like
1973, just a year before the most widespread slump in capitalism
since 1929-30.